Political Entrepreneurs

The Economic Engine of Political Change

Category: Tax Reform

The lead article from the February 2, 2013 edition of the Economist highlights Nordic countries as a case study in economic reform. The four main Nordic countries — Sweden, Norway, Denmark, Finland — have lessons to share, both in terms of the mistakes that got them into an economic mess and the policies they adopted to get out. The article begins by noting that the Nordic countries had remarkably high ratios of government spending as a share…Read more»

Daniel Henninger’s article in today’s Wall Street Journal is angry, but it also makes a good point about the opportunity for fiscal reform in the United States. For the short term, it’s looking bad. And yet, as Henninger points out, we know the recipe for success. Reagan applied it in the Tax Reform Act of 1986. The ’86 tax act reduced tax rates on personal income and also famously gutted many nonproductive “tax shelters.” In short,…Read more»

As both sides ponder the results of the “Fiscal Cliff” negotiations, one thing is clear. This was not a major reform. It was a short-term fix. In the opening chapter of Madmen, Ed and I argue that while significant reform often comes about as a result of a crisis, this need not always be the case. (In chapter 6 we discuss airline deregulation as an example of a major reform that did not emerge from crisis.)…Read more»

Happy New Year! What political change — what meaningful reform — would you like to see in 2013? Watching the current debate in Washington, one might be pessimistic about the possibility of meaningful reform on spending, taxes … the big issues. And yet, the need for reform grows every day. The U.S. Census Bureau’s latest projections are for the population age 65 years and older to more than double by 2060, from 43 million to 92 million…Read more»

Gerard Depardieu is giving up his French citizenship due to his home country’s oppressively high tax rate. Bloomberg reports that the French Prime Minister Jean-Marc Ayrault called the move “pathetic” and that other ministers joined in the condemnation. But Depardieu is not alone. The famous (and increasingly infamous) actor was preceded by French billionaire Bernard Arnault, chief executive of LVMH Moet Hennessy Louis Vuitton, who also found the country’s tax rate to be unbearable. The French government…Read more»

Today’s Washington Post highlights the latest twist in the debate over the so-called “fiscal cliff” and how the U.S. government should find new ideas as it tries to balance its budget. The “new” idea: eliminate or substantially modify the mortgage interest deduction. Both Democrats and Republicans have made statements in support, albeit with few specifics. Why is this news? The 1986 tax reform, which substantially removed all kinds of deductions, left mortgage interest untouched. The special interests…Read more»

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.189, ch.7)

The most successful entrepreneurs know what they do well, they know the market and the opportunities within it, and they choose those activities that create the most value. This is true in economic as well as political markets.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.178, ch.7)

[W]hen the right elements come together at the right time and place and overwhelm the status quo, it is because special people make it happen. We call them political entrepreneurs.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.176. ch.7)

While we started this book with Danny Biasone saving basketball, we end it with Norman Borlaug saving a billion lives. These stories are not that different. Both faced vested interests, which were reinforced by popular beliefs that things should be a certain way—that is, until a better idea came along.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.174, ch.6)

Because there was a general belief that homeownership was a good thing, politicians found the public with open arms.... Everybody was winning—except Alfred Marshall, whose supply and demand curves were difficult to see through the haze of excitement at the time, and except Friedrich Hayek, whose competition as a discovery procedure was befuddled... In short, once politicians started getting credit for homeownership rates, the housing market was doomed.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.166, ch.6)

Everyone responded rationally to the incentives before them. In short, the rules that guided homeownership changed over time, which in turn changed the incentives of these actors. And bad things happened.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.153, ch.6)

They understood the economics. The ideas had already won in ... the regulatory agency itself. All that remained to be overcome were some vested interests and a handful of madmen in authority.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.146, ch.6)

If the idea for auctions of spectrum use rights had been part of the public debate since at least 1959, why didn’t the relevant institutions change sooner? What interests stood in the way?

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.121, ch.5)

When an academic scribbler comes up with a new idea, it has to resonate well with widely shared beliefs, which in turn must overcome the vested interests at the table. Many forces come together to explain political change, even though it may seem like coincidence of time and place.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.120, ch.5)

It’s the rules of the political game that deserve our focus, not politicians’ personalities or party affiliations.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.119, ch.5)

In short, ideas are a type of higher-order capital in society. Like a society that is poor in capital and therefore produces little consumer value, a society that is poor in ideas and institutions will have bad incentives and therefore few of the desirable outcomes that people want.